The Effect of Trade Openness on Income Inequality with the Role of Institutional Quality

Siong Hook Law,Lim Thye Goh

doi:10.31258/ijesh.1.2.65-76

Abstract

This study investigates the effect of trade openness on income inequality using the panel system generalised method of moments (GMM). The sample countries consist of 65 developed and developing countries and the time period covers from 1984 to 2012. This study also provides new evidence that sheds light on the role of institutional quality in influencing the effectof trade openness on income inequality. The empirical results reveal that trade openness tends to increase income inequality. In addition, the marginal effect also revealed that institutional quality has a corrective effect on the trade openness – income inequality nexus.

Highlights

The dynamic advantages of trade openness on the positive growth oftrade have always been discussed and highlighted by policy makers, they include increased exports, job opportunities and most importantly economic growth (WTO, 2007)
Model 1 highlights the estimation result of the Equation (1), whereas Model 2reports the estimate of Equation (2), which examine the marginal effect of institutional quality on the trade openness – income inequality nexus
This study highlights the role of the institutional quality variable in the trade openness – income inequality nexus

Summary

Introduction

The dynamic advantages of trade openness on the positive growth oftrade have always been discussed and highlighted by policy makers, they include increased exports, job opportunities and most importantly economic growth (WTO, 2007). According to the United Nations Development Programme report (UNDP) (1999), the top fifth of the world's people in the richest countries enjoy 82 percent of the expanding export trade and 68 percent of foreign direct investment and the bottom fifth, enjoy barely more than 1 percent of export trade and foreign direct investment respectively. This implies that whilst trade openness promotes economic integration it says nothing about income distribution parity. It was reported that one of the reasons this increase occurs is through the importation of technology which raises the returns to skilled labour and reduces the demand for unskilled labour

Methods

Results

Conclusion